Facing Facts Alert 10

Number 10, November 6, 1995

Facing Facts Alert 10

FACING FACTS
The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
FAX ALERT ( Number 10, November 6, 1995)
IF WE MUST HAVE A CHILD TAX CREDIT, MAKE IT "KIDSAVE"
The reasoning behind the new "KidSave" tax credit proposal goes like
this. The last thing we need right now is a tax cut, but if we're
going to get one, why not ensure that it advances the ultimate goal of
deficit reduction: boosting national savings? Indeed, why not?
Getting Outside the Box
The KidSave proposal, formulated by Senators Bob Kerrey and Joe
Lieberman, would allow a $500 tax credit for each child -- provided
that parents invest it in a qualified retirement account in the
child's name.
This would raise national savings -- and future incomes -- relative to
what they would be if parents were free to spend the child tax credit
on current consumption. True, parents might offset some of the new
child credit savings by reducing other household savings. On the
other hand, the existence of new savings accounts in which people can
see personal assets grow might constitute a psychological accelerator
that encourages them to save more -- and this would work the other
way.
Some will object to KidSave's mandated savings as unwarranted
interference in families' private choices. If the child credit --
like the other GOP tax cuts -- will be paid for through cuts in
federal spending, why attach strings? The tax cut, after all, is
"deficit neutral."
But is it? Within the political framework of the budget debate --
which presupposes that Congress would make an equal reduction in its
proposed spending cuts if it were to cancel the child tax credit --
the answer is yes. But if we step outside the conventional box of
"budget process," the answer is no. Considered as a separable polcy
initiative, each dollar of the credit adds a dollar to the federal
deficit.
In this perspective, a no-strings child credit is a cruel hoax on
children, its ostensible beneficiaries. Even if the entire credit
were efficiently invested in children, it would merely offset an equal
amount of extra public debt which children will eventually have to pay
back. But all of the credit wouldn't go to children. Suppose that 50
cents on the dollar does -- a generous assumption. Then suppose that
of that 50 cents, half will be allocated to financial or human capital
investments (like child health and education) that yield future
returns. Against that 25 cents, the federal government will have
incurred a dollar of debt. For kids to break even, money invested by
parents on their behalf would have to generate returns four times
greater than the interest cost on the public debt -- an outlandish
assumption.
The More Savings the Better
Viewed in these terms, KidSave would at best cancel out public
dissavings -- and hold children harmless.
To reject this plain arithmetic is to retreat unreflectively into the
budget process box and claim that our path toward a perfectly balanced
budget -- and an optimal rate of national savings -- is already set in
stone. This is not so. Even under the House plan, deficits will add
$739 billion to the national debt over the next seven years. In 2002,
the plan projects a razor-thin surplus of $1 billion, even if all the
spending cuts are enacted and all the savings occur. A blip in the
economy -- or a blink by Congress -- and the surplus evaporates. Tax cuts
are forever, a Hill saying goes, but spending cuts are only good until
the next budget season.
All of this, moreover, ignores what everyone knows: Beyond Congress's
seven-year time horizon, deficits are once again scheduled to surge.
"The Baby Boom generation hitting Medicare is like a tsunami," notes
Martin Corry, AARP's candid director of federal affairs. "All we're
doing this year is buying some time."
Former Colorado Governor Dick Lamm likes to say that Christmas is a
time when kids ask Santa Claus what they want and parents pay for it.
Deficits are a time when parents tell government what they want and
kids pay for it.
Given the foreseeable impact of America's age wave on the federal
budget and national savings, the best policy would be to forego all
tax cuts and aim for a substantial budget surplus. If not now, with
the Baby Boom swelling the workforce and a small generation retiring,
when? But if we must have a tax cut, rather than a child credit which
borrows from kids to finance a new tax entitlement for their parents,
let's enact a credit that helps them -- or at least doesn't hurt them.